Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 1.) Whether an individual who receives a lump-sum payment for a retroactive salary adjustment as a result of an interest arbitration award, is receiving a "qualifying amount" as defined in 110.2 of the Act? 2) When an individual attaches a Form T1198 with its income tax return, will the Canada Revenue Agency only make an adjustment to the individual tax calculation if it is beneficial to the individual? 3) What requirement or responsibility is there to the payor of a qualifying amount to complete the Form T1198 when requested by the recipient of the lump-sum payment?
Position: 1) An interest arbitration award could be a qualifying amount. 2) Yes. 3) There is no legislated requirement in the Act or in the Income Tax Regulations that requires a payor to issue a form T1198
Reasons: 1. The law. 2. Application of CRA assessing system. 3. The law.
XXXXXXXXXX 2008-026423
N. Shea-Farrow
April 14, 2009
Dear XXXXXXXXXX :
Re: Retroactive Lump-Sum Payments for Individuals
We are writing in response to your letter of December 21, 2007 concerning a lump-sum payment for a retroactive salary adjustment as a result of an interest arbitration award. More specifically, you would like clarification on the following:
1) Whether an individual who receives a lump-sum payment for a retroactive salary adjustment as a result of an interest arbitration award, is receiving a qualifying retroactive lump-sum payment ("QRLSP")?
2) When an individual is in receipt of a QRLSP, will the Canada Revenue Agency ("CRA") only make an adjustment to the individual's tax calculation if it is beneficial to the individual?
3) What requirement or responsibility is there to the payor of a QRLSP to complete the Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment, when requested by the recipient of the QRLSP?
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as set out in Information Circular 70-6R5 dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. Notwithstanding the above, we are prepared to provide the following general comments, which may be of assistance.
Sections 110.2 and 120.31 of the Income Tax Act (the "Act") may provide relief to certain individuals who receive taxable lump-sum payments from their employer relating to services that were performed in prior years. Under these provisions, if an individual's current tax liability under Part I of the Act for such a lump-sum amount is higher than it would have been if each portion of the particular lump-sum amount had been taxed in the particular taxation year in which it otherwise relates, the individual's tax liability is essentially computed based on the lower amount of notional Part I tax for that particular year.
More specifically, in computing taxable income for a taxation year, section 110.2 of the Act permits individuals to deduct the total of all amounts each of which is a "specified portion" of a "qualifying amount" received by the individual in the particular year if the total is $3,000 or more. In addition, a specified portion must relate to an "eligible taxation year". Each of these highlighted terms is defined in subsection 110.2(1) of the Act.
For the purposes of this special tax calculation a "qualifying amount" is defined, in part, as a lump-sum amount received pursuant to:
(1) an order or judgment of a competent tribunal,
(2) an arbitration award, or
(3) a contract by which the payor and the individual terminate a legal proceeding.
In our view, if the particular lump-sum amount is paid to the individual as the result of an arbitration award resulting from a bona fide arbitration process, such a lump-sum amount could be a qualifying amount. In that respect, it should be noted that since you have written to us, the Form T1198 has been revised and now states "amounts not qualifying: an amount under normal collective bargaining, such as negotiated back pay (although, an amount from an arbitration award does qualify)".
Where an amount is deducted under subsection 110.2(2) of the Act, section 120.31 of the Act provides for the calculation of an additional tax payable for the individual for that taxation year on the amount deducted. The additional tax payable is the total of two amounts. First, it is the total of the additional notional taxes payable that would be triggered for each relevant preceding year (i.e. eligible taxation year) if the specified portion of the lump-sum payment that relates to that preceding year was added to the individual's income for that tax year. Second, it includes a notional amount of interest that is computed for each relevant preceding year to take into account the fact that this additional notional tax was not paid during those preceding years.
To take advantage of this special tax calculation an individual must file Form T1198, with his or her income tax return for the year in which the particular lump-sum amount was received. It should be pointed out that this special tax calculation would only be of benefit where the receipt of the lump-sum payment by the particular individual in the current taxation year places the individual in a higher tax bracket than would otherwise be, if the specified portion of such amount was received in the particular taxation year to which it relates. However, when an individual attaches a Form T1198 with his or her income tax return, the CRA will only apply the special tax calculation if it is beneficial to the taxpayer.
Finally with respect to your third question regarding the responsibility of the payor of a lump-sum payment to complete Form T1198, there is no legislated requirement in the Act or in the Income Tax Regulations that requires a payor to issue a Form T1198. However, it would seem appropriate for a payor to issue a Form T1198, thereby permitting the recipient to benefit from the above provisions.
We trust that these comments will be of assistance.
Yours truly,
Sharmini Ratnasingham
Manager
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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